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A decade ago, I asked a venture capitalist in computer networking if dedicated network gear would ever be replaced by software running on a standard computer. My hypothesis was that as general-purpose computers became more powerful, they could absorb functions that previously required specialized computer hardware, the way many functions can be performed on PCs today that once required mainframes. The venture capitalist assured me it would never happen, for a variety of reasons, even if it became technologically possible.

Fast forward 10 years, and the computer networking world is abuzz with talk of "software-defined networking"— software that can perform the same functions as dedicated hardware, but instead runs on an Intel-based server.

But the discussion of SDN is a sideshow. A more prosaic battle is playing out, as Cisco and others are already cannibalizing the network switches they have long sold, providing what are called "virtual" switches that are just software programs that run on a server.

A network switch or router is a specialized computer with specially developed chips that perform calculations to determine how to direct bits of data between computers. As complex as they are, some of those calculations can now be efficiently performed in software running on
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(INTC) processors.

Think of a computer network like a tree, made up of the trunk (the most complex, core switches), branches (less complex switches), and leaves (computers). The tiniest branches, the parts closest to individual computers, are established using "edge switches." They are the simplest, cheapest equipment, and they can most easily be replaced by software, says Joe Skorupa, who follows the market for Gartner.

"It is absolutely the case that if you build it properly in a virtual environment, you don't need as many switch ports" in hardware, says Skorupa. He thinks VMware is in the lead in replacing the humble edge switch with software.

VMware sells a program called the "vNetwork" switch, running on servers that also use its "hypervisor" software. And Cisco sells a program called the Nexus 1000v that can run on top of VMware's hypervisor, and also on servers running
Microsoft's
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(MSFT) operating system. Both are alternatives to Cisco's Nexus line of hardware.

The virtual switch movement is already having an impact on network equipment, shaking up the rankings of who's top dog in individual categories of switching.

Dell'Oro Group, the Silicon Valley market-research firm that has for years tracked shipments of networking hardware, says that sales of a switch called an "application delivery controller" are beginning to shift toward "virtual" units, with software actually displacing networking gear.

F5 Networks has traditionally dominated ADC sales, but Dell'Oro shows that in the first quarter of this year, competitor
Riverbed Technology
(RVBD) was in the top spot, with 28% of the virtual ADCs; F5 had only 20%.
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(CTXS), which is an enterprise software vendor, and not a networking vendor, had third place in the ADC market, at 16%.

That little tidbit prompted Morgan Stanley analyst Ehud Gelblum on June 3 to cut his rating on shares of F5 from a Buy to a Hold, writing that virtual switches turn out to be more important than he'd previously thought, citing the Dell'Oro data.

THAT'S NOT THE ONLY REVERSAL. Dell'Oro claims that Riverbed, which sells the vast majority of switches known as "WAN optimization," is No. 2 in virtual switches, while Cisco is in the top spot and closely held Blue Coat Systems is third.

Casey Quillin of Dell'Oro tells me that it's difficult to put a number to the amount of cannibalization that's going on. For one thing, in some cases, virtual switches displace hardware sales while in other cases they are complementary. Then too, there aren't precise data on how virtual switches are used once they're shipped. But the trend is clear, he says: "Physical unit growth is slowing and virtual appliance unit growth is increasing."

"An entire class of switching equipment may go away," Skorupa says. Extrapolating a bit, he adds, "What could change the world is if Microsoft buys one of these software-based networking vendors and certifies their wares to work with System Center," Microsoft's program for computer management, in conjunction with no-name switching equipment.

He was thinking of startups such as Cumulus Networks and Pica8 that make switching programs that run on no-name hardware.

A report in late May by Morgan Stanley's Gelblum and his colleague Scott Devitt, who covers Amazon, warned that Amazon Web Services threatened just about all traditional IT vendors.

Amazon Web Services can become a buyer of tremendous power, and one thing it may do is buy a lot more networking software than hardware, they opine.

The immediate result, says Skorupa, is that switch software should cost less than hardware boxes, which means lower revenue for networking vendors.

Although the market for software switches is still young, early success may be a part of the recent weakness in results of the networking vendors. Their first-quarter reports in April and May were dispiriting.

Juniper Networks, F5, and Riverbed all reported lackluster results and outlook. Cisco slightly beat expectations and offered an in-line forecast, making it the best house in a bad neighborhood.

Cisco has already said that it expects to become more of a software and services vendor than simply a box maker. It's an open question just how drastically the software movement upends results for Cisco and its smaller competitors, and whether challengers such as Citrix will find themselves with tremendous upside.